2.5- economic growth Flashcards
Definition of economic growth?
The expansion of the productive potential of the economy. It is measured by the annual change in real GDP.
What factors cause economic growth? 6
- improving the labour force, with a better quality due to higher education.
- A large labour force- due to migration.
- Improved technology- resources used more efficiently.
- more investment- more machinery can be bought, increase production.
- discovering new resources- such as oil.
- incentives for enterprise- such as subsidies.
definition of actual growth?
percentage increase in a country’s real GDP and it usually measured annually. It is caused by increases in AD.
definition of potential growth?
the long run expansion of the productive potential of an economy. It is caused by increases in AS. The potential output of an economy is what the economy could produce if resources were fully employed.
When does export led economic growth occur?
When countries open up their economies to the international income. Example- CHINA
What is comparative advantage?
when it can produce goods and services at a lower opportunity cost than another.
The importance of international trade for export led growth:
- Initially increase AD, so will only bring about short term growth.
- Export led growth means the economy is unbalanced, since there is a surplus on the current account.
- however the increase in the economy may lead to an increase in imports which will balance the current account.
- countries may rely on the economic state of other countries.
What is actual growth?
The percentage increase in a countrys real GDP.
What is long term trend in growth rates?
the long run expansion of the productive potential of the economy. Caused by an increase in AS.
What is an ouput gap?
An output gap occurs when there is a difference between the actual level of output and the potential level of output.
When does a negative output gap occur?
the actual level of output is less than the potential level of output.
Usually means there is the unemployment of resources in an economy, labour and capital are not used to full productive potential.
When does a positive output gap occur?
When the actual level of output is greater than the potential level of output.
- could be due to resources being used beyond normal capacity- such as overtime labour.
Why is it difficult to measure an output gap?
- difficult to estimate the trend in a series of data.
-The structure of the economy often changes, which means estimates may not always be accurate. - for example, may be a recession, the level of spare capacity may fall, banks might be unwilling to lend.
-changes in the exchange rate might offset some inflationary effects in a positive output gap
Data is not always reliable.
DRAW OUTPUT DIAGRAM
keynesian economists- output gaps occur in both the long and short run.
classical economists- output gaps only occur in the long run. In the long run, markets clear and there is full employment.
What is the business cycle?
Refers to the stage of economic growth that an economy is in.
Booms and busts.
